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Total Number of Subscribers: 451 |
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Date: 23rd July 2008 |
Compiled by Mr. M. Sathya Kumar |
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Taxability of VRS compensation Terminal
benefits cannot be brought within the scope of “amount received” under Section 10(10C), which was introduced
to make voluntary retirement attractive. Section 10(10C) of the Income-Tax Act, 1961 exempts payments
received by a salaried employee from the employer under a Voluntary
Retirement Scheme up to Rs 5 lakh. The law requires that the scheme should be
framed in accordance with the guidelines prescribed in Rule 2 BA of the I-T
Act. No relief is available if the scheme is not approved prior to the date
of voluntary retirement. Subsequent approval will not entitle a retired
employee to claim exemption. Section 10(10C) was inserted to make voluntary retirement
attractive. Finance Act, 2003 amended Section 10(10C) so as to provide
exemption from tax even if the amount received on voluntary retirement is
paid in instalments. . Guidelines for the scheme were framed under Rule 2BA which was
inserted by the I-T (Sixteenth Amendment) Rules, 1992. The Rule prescribes that the scheme will be applicable to
employees who have completed 10 years of service or reached the age of 40. It
is also required that the scheme should result in overall reduction in the
existing strength of employees. Vacancy caused by voluntary retirement is not
to be filled up. The employee on retirement cannot be reemployed in any
company under the same management. These are rather stringent rules. RBI’s OERS The Reserve Bank of India (RBI) has been operating a VRS known
as Optional Employees Retirement Scheme (OERS). Employees have been claiming
exemption up to Rs 5 lakh in respect of amounts received on severance from
the Bank. The RBI, however, informed the employees that the OERS did not
fulfil the guidelines laid down under Rule 2BA of the I-T Rules. According to
the RBI, the payment was in the nature of ex
gratia and taxable. The RBI also deducted tax at source on all
such payments. Choksi & Company, Chartered Accountants, informed the RBI
that the scheme was not in conformity with Rule 2BA. Employees of the RBI have been agitating the case for exemption
up to Rs 5 lakh. They point out that the annual report of the RBI for 2003-04
referred to the need for the Bank to have technical upgradation towards
streamlining the work in its general and core functions. On account of OERS, 4468 officers and employers were retired all
over India. Manpower strength had come down. This was confirmed in the
newsletter of the RBI. Those who opted for the scheme were mostly close to
the retirement age. The central bank had the absolute discretion to accept or
reject an OERS application. The RBI’s contention was that the OERS was a
negotiated document which enabled employees to retire and pursue their
interest actively. It was not drawn up for overall reduction in the existing
strength of the employee. The fact may be that the scheme resulted in overall reduction in
strength. This was not the intention behind the scheme. The employees however
argued that the context of the scheme should be considered. Merely because
the RBI or its auditors stated that the scheme was not in conformity with the
requirements of Rule 2BA, exemptions cannot be denied. Court ruling The matter was considered by the Calcutta High Court in writ
petition in 4957/W/2004. The court felt that, prima facie, money received on account of voluntary
retirement up to Rs 5 lakh was not taxable. Neither the opinion of the
chartered accountants nor the views of the RBI will finally determine the
fate of exemption claimed under Section 10(10C). According to the court, the
scheme fulfilled the requirements of Section 2BA and exemption was available
up to Rs 5 lakh. The employee is also eligible to claim simultaneous benefit
under Section 10(10C) as well as relief under Section 89 for arrears of
salary. Emphasis is on amount receivable and not on the manner, method or
mode of payment. All that is required is that the limit prescribed should be
adhered to in granting exemption. Terminal benefits cannot be brought within
the scope of “amount received” under Section
10(10C). The interpretation placed on the RBI’s OERS has been uniformly accepted by all the Benches of the Income-Tax
Appellate Tribunal (ITAT) in India. No decision has been brought on record to
deny exemption. The analysis of Section 10(10C) of the Act and Rule 2BA of the
I-T Rules contained in the detailed order of the Three Member Bench of the
ITAT (in 302 ITR AT 49 Lucknow),
will be of immense value not merely to the RBI employees but also to
employees in other organisations claiming the benefit of exemption for VRS
compensation up to Rs 5 lakh. |
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